Opinion: What Lehman's woes mean for the $NZ

By BNZ Currency Strategist Danica Hampton NZD The NZD/USD has traded choppily within a 0.6600-0.6800 range over the past 24 hours, pushed around by the countervailing forces of a weaker USD and rising risk aversion. Early in the offshore session, the NZD/USD was underpinned by USD weakness amid fears about the health of the US financial sector. Lehmans shares fell nearly 40% after the Korean Development Bank decided not to buy a stake in the beleaguered US investment bank. Any confidence lingering from the weekend's Fannie Mae and Freddie Mac bailout package was quickly sapped. The S&P500 dropped 3.4%, 'safe-haven' demand saw US 2-year government bond yields slide 10bps to 2.20% and reduced yield support weighed broadly on the USD. However, the sharp losses in US equities also sparked risk aversion inspired selling of JPY crosses. Our risk appetite index (which has a scale of 0-100%) slipped to 41% last night well below last week's high of 53%. NZD/JPY fell from around 73.50 to 71.50 and NZD/USD was knocked from its highs. Worries about global growth and a sharp pull-back in commodity prices have also taken a toll on NZD. Crude oil prices fell nearly 4% after OPEC said it will not cut production quotas, gold prices slipped 3% and the CRB index is down 1.7%. But more importantly for NZ, there is increasing recognition that global dairy prices are retreating, which will likely reduce Fonterra's dairy payout over coming seasons. While NZD/USD will take its intra-day cues from USD sentiment and risk appetite, we look for consolidation within familiar ranges in the lead up to Thursday's RBNZ decision. On the topside, we expect headwinds towards the 0.6790-0.6800 region. Initial support is seen around 0.6600-0.6620, and it will take a break below 0.6590 to suggest the downtrend is gaining traction. Majors The USD slipped against the most of the major currencies last night, weighed down by worries about the fragile state of the US financial sector. Lehmans shares slumped nearly 40% last night after the Korean Development Bank said it was no longer considering investing in Lehmans. Ratings agency S&P placed Lehmans on negative watch and Lehman's credit default swap (CDS) blew out nearly 150bps to 459bps. Interestingly, Bear Stearns' credit default swap spiked to 417bps just before its near-collapse earlier in the year. The Lehmans news quickly sapped investor confidence inspired by the weekend's Freddie Mac and Fannie Mae bailout package. The S&P500 fell 3.4% last night (and is down 4.5% since the start of September) and 'safe-haven' demand weighed on US interest rates. US 2-year government bond yields slid 10bps to 2.20% last night and money markets are now pricing in some risk of the Fed cutting rates by the end of the year. After falling nearly nine big figures in less than a month, from above 1.4900 to below 1.4050 yesterday, the EUR/USD was looking overdue a bit of consolidation. Consequently, it's not surprising that market participants used negative news about Lehmans as an excuse to take profits on long USD positions. Rumored demand from sovereign accounts and reports that Germany's Bayer may be launching a takeover bid for US company Pfizer also helped bolster the EUR sentiment. EUR/USD rebounded strongly from below 1.4050 to above 1.4200. However, the sharp drop in US equities also triggered risk aversion and another wave of JPY cross selling. During times of risk aversion, investors tend to sell higher yielding currencies against 'safe-haven' currencies like JPY. Our risk appetite index (which has a scale of 0-100%) slipped to 41% last night from yesterday's 44% (and well below last week's high of 53%). EUR/JPY slipped from around 153.50 to 151.50 and this helped knock EUR/USD off its highs. The combination of a broadly weaker USD and selling of JPY crosses pushed USD/JPY from above 108.00 to below 107.00. Market participants largely ignored the US economic data. Pending home sales dropped 3.2%m/m in July (slightly worse than -1.5% forecast), but wholesale inventories climbed 1.4%m/m in July (well above 0.7% forecast) and the IBD/TIPP optimism index climbed to 45.8 in September (vs. forecasts of 44.0). * Danica Hampton is BNZ's Currency Strategist. All of the research produced by the BNZ Markets team of economists is available here.